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Entities active in food supply in Slovenia – beware of the latest amendments to the Agriculture Act

Thursday, 19 April 2018, will be marked by the entry into force of the Agriculture Act (Zakon o kmetijstvu; “ZKme-1”) amended by ZKme-1E, which will introduce a stricter regulation of unfair trading practices in the food supply chain in Slovenia, and will consequently affect importantly business transactions of both suppliers of food and retailers in Slovenia. The amended ZKme-1 will also go far beyond the minimum standards of protection relating to unfair trading practices which the European Commission put forward in its proposal for the Directive on unfair trading practices in business-to-business relationships in the food supply chain, published just last week.

Since 2014 (amendment ZKme-1B), ZKme-1 has already included a general prohibition of the so-called non-permitted trading practices in the food supply chain (nedovoljena ravnanja v verigi preskrbe s hrano). Any actions by which one party with significant market power, evidenced by volume or value of sales, exploits other party contrary to good business practices have constituted non-permitted practices. ZKme-1 has also set out two sets of examples of non-permitted practices and provided for nullity and voidness of those parts of agreements which included non-permitted practices. Fines in the range of EUR 6,000–18,000 have been set forth for entities carrying out non-permitted practices. The Food Supply Chain Relationships Ombudsman has also been introduced. However, Competition Protection Agency’s enforcement has been low, allegedly due to the lack of the clarity of rules.

ZKme-1E now allegedly strives to provide further clarity and better legal ground for enforcement, aiming to protect agriculture producers, establish fair relations between the partners in the food supply chain, increase food self-sufficiency, and ensure better consumer protection. 

The existing rules on unfair trading practices in the food supply chain will be expanded in the following five major aspects:

    1. a presumption of significant market power will be introduced—undertakings active on purchase side and generating at least EUR 25 million annual sales in Slovenia will be presumed to have significant market power (new Article 61.f(2) ZKme-1);
    2. the scope of examples of non-permitted practices will now stretch to 23 examples (in addition to a general clause prohibiting non-permitted practices) — examples include listing fees, contributions for expansion of retail/distribution network, return of delivered but unsold goods, most-favoured customer clauses, exclusive supply clauses, and even prohibition of assignment of receivables, and regular or disproportional cassa sconto discounts (new Article 61.f(3) ZKme-1);
    3. agreements in the food supply chain will have to be in writing, entered into before the delivery of goods and with several obligatory elements on the subject matter (such as framework volume of sales, value of sales, and pricelists of goods; term; payment details; delivery options; rules on changes of prices; force majeure rules) (new Article 61.g ZKme-1);
    4. duty upon a managing or supervisory body—which cannot be delegated to other responsible persons—to set forth monitoring over working processes, employees and external contractors to prevent non-permitted practices (new Article 61.h ZKme-1);
    5. fines will be increased to up to 0.25% of annual sales in Slovenia for entities carrying out non-permitted practices or infringing rules on obligatory elements of agreements, and to EUR 5,000–10,000 for responsible persons of such entities (new Article 177.a ZKme-1).

Rules of new Articles 61.f, 61.g and 61.h ZKme-1 will be applicable from 1 January 2019 onwards so companies have a short transitory period to adapt themselves to the new regime.

Despite legitimate goals, their implementation under ZKme-1E seems questionable and we expect considerable practical difficulties in compliance. These are some of the challenges that the companies will likely face:

    • there are no robust criteria for establishing if a company possesses significant market power towards a counterparty or not. The presumption of having significant market power is arbitrarily set at (general) EUR 25 million of annual sales, which even do not need to be generated solely in the food supply chain in Slovenia. Will undertakings really be treated equally with regard to their market power in the food supply chain according to such turnover threshold? How can a company establish the required monitoring obligations under Article 61.h ZKme-1 if it is not clear whether it enjoys significant market power or not?
    • Further, several of the 23 examples of non-permitted practices under Article 61.f(3) ZKme-1 lack certainty and clarity (both for companies and for the Competition Protection Agency as enforcement authority), which is particularly problematic due to their fining character and constitutional principle of clarity and certainty. It is also disputable whether such interference with contractual autonomy and free economic initiative is constitutional given the scarce justification of proportionality test by the legislator. Besides, the list of non-permitted practices exceeds the practices considered as unfair by respondents to the Competition Protection Authority inquiry of unfair trading practices in the inquiry of the food supply sector from 2017.
    • Formal elements of agreements under Article 61.g ZKme-1 may not be easily achieved in particular with the smallest agriculture producers, which might lack resources for the red tape. It might turn out that instead of their enhanced protection by ZKme-1, they might risk reluctance for further business cooperation by retailers.